Online Trading Blog

W.D. Gann was one of the most successful traders ever profited from stock and commodity market. He is known for his predictions regarding both financial matters and others, was a publisher of some of the most read books and was the inventor one of the most popular trading theories. In early 1920’s he opened two trading accounts, $300 and $150 accounts, and was able to make great profits; profit of $25,000 in three months from $300 account and $12,000 in one month from $150 account.

Gann in 1908 invented his so called ‘theory of market time factor’. The theory holds that the market price movements are predictable. The three basic underlying assumption of market time factor theory are:

1. There are only three market factors to consider – Price, time and range.
2. The market works in a cyclical manner.
3. The market is geometric in nature; in both design and function.

Gann studies involved three main areas as

1. Price studies – which include support and resistance levels, angles and pivot points.
2. Time studies – which involves identifying historically reoccurring days.
3. Pattern studies – which involve studying the markets using different patterns and trendlines.

Gann’s trading and market timing ideas were simple but they demand total dedication to be a master of them. Also there is hardly any follower of Gann studies who replicated the trading success that Gann got, although there are many who managed to get over-average returns. Now for most traders, Gann studies are one another method to analyze markets trends and to find support and resistance levels.

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Rising three methods is a candlestick continuation pattern which indicates the continuation of a bullish trend even after a temporary halt in trading. It is a multiple candlestick pattern which include more than three candlesticks (ideally include five candlesticks); of which the first and last candlesticks are long bullish (white/colorless) candlesticks. The middle candlesticks may be all bearish (black/colored) or can be a mixture of bullish and bearish candlesticks. Bullish rising three methods is highly reliable when all middle candlesticks are bearish.

The requirements of a bullish rising three methods pattern include

Pattern should be formed in a noticeable uptrend.
First day should be noticeable with a long bullish candlestick and high bullish activities.
First day candlesticks should be followed by short-bodied candlesticks of which real-body and shadow do not cross first days trading range.
The last day should be noticeable with a long bullish candlestick which close well above first day’s candlestick.

Bullish rising three methods pattern occurs when bears are unable to bring the prices down below first days range. This boosts the confidence of the bulls and the prices are then taken to the new highs.

Bullish rising three methods pattern is considered as a highly reliable trend continuation pattern. Reliability of the pattern increases with shortening of real-bodies (doji formations) of middle candlesticks and decrease in trading volumes of middle days. Confirmation is still suggested with this formation which can be a bullish candlestick on new day.

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Sector ETF (Exchange Traded Fund) rotation strategy aims at maximizing the return by buying and selling sector ETFs. This is an active investment management strategy and if successfully followed offers much more return than investing in single sector-based ETF. Sector ETF rotation strategy also offer greater flexibility as now there are a number of sector ETFs available (finance, services, industry, technology, energy, etc.) and also ETFs with different proportion of holdings are available with in a sector.

ETF sector rotation strategy is a long-term trading strategy which is usually done in a cyclical manner. The followers of this strategy believe that the economy operates in a cyclical manner and every industry have peak and down times. So there is a greater chance of profitability if the trader invests in the sector at the end of the down time and withdraws it at the peak of the peak time; and then invests in other sector. More over many sectors/industries are inter-related so better/worst performance of one can indicate the upcoming performance of other sector.

The most difficult task involved in ETF sector rotation strategy is identifying the economic and sector cycle. The trader should do good initial research to create his investment plan. When figuring out his plan the trader should consider many factors including seasonal price changes, whole economic performance, predicted economic performance, his risk-tolerance, allocated portfolio portion to ETFs, his trading knowledge, etc. With this strategy it is advised to invest in more than one (distinct-related) sector ETF at a time as it is possible to cover ones loss from profit of other.

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By definition trades executed before normal trading hours are known as before-hours trades and trades executed after normal trading hours are known as after-hours trades. Often these sessions are called off-hours trading and the most common practice followed during the session is crossing – the matching of buy and sell orders.

There are mainly three type of off-hours trading practices, which are,

1. Exchange after hours market – This is an hour (or half or quarter hour) long trading session where buy and sell orders are executed at market closing price. For NYSE this crossing session last from 4.00 pm to 5 pm.
2. Foreign exchanges after hours market – Many foreign stock exchanges trade NYSE or similar US exchange listed stocks.
3. ECN after hours market – this is so far the most prominent after hours market regulated by Electronic Communication Networks (ECNs) which allow institutional and individual investors to trade stocks; often with limit orders.

Traders can participate in after-hours trading though their brokers who offer access to one or more ECN. The trading hours, ECN charges and liquidity differ with ECNs. Most brokers have restrictions on order types. Off-hours trading help traders to profit from news and reviews released after the normal trading hours. But before and after hours trading are not as much as liquid as normal hours trading; and usually ECNs do not have common reporting systems and thus prices for same instrument can vary with different ECNs, providing traders an opportunity to profit from arbitrage.

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The Week Ahead: General Electric with its multi-faceted business confirms the broad nature of the current economic decline with a 44% drop in Q4 earnings. The markets will digest a busy week of reports starting with existing home sales and leading economic indicators on Monday. The FOMC kicks off a two day meeting starting Tuesday leading to a decision on interest rate policy on Wednesday. The new home sales and durable goods data is released Thursday while Friday produces what could be an interesting final Q4 GDP report for the economy.

Stocks to Watch: Despite the recent collapse in the stock of Aflac inc.(AFL), company executives say the financial position is strong and backs a Q4 EPS growth target of 15%. Southwest Airlines (LUV) received a downgrade because the company has little protection against a renewed surge in oil prices. Tempur-Pedic (TPX) showed a penny per share versus .52, but anticipates '09 EPS .70-.90. Geron Corp. (GERN) shares soared after an FDA okay to begin stem cell studies on patients with spinal injuries.

Special Note: Investors will be watching for signs of a reversal of the recent 3 week slide in stocks which seems to be relentless. Announcements from the new administration regarding stimulus plans for the economy may provide enough impetus for a relief rally despite further disappointing economic numbers. Otherwise, a swoon to new lows below November could be here rather quickly if confidence fades in the new President or his plans.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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January effect is the tendency of stock markets to rise in the month of January. The tendency is more evident in first week of January. January effect is more evident in small-cap and mid-cap stocks and different stocks and markets are differently affected by the effect.

The main reason for January effect is related to Tax paying. Investors and traders sell-off their holdings to claim a capital loss or to get lower taxes before the end of the tax calendar (in December) causing the prices to fall. In first week of January these investors/traders reinvest their money and buys-back stocks, and the prices rise. For S&P January effect took place 32 times out of total 39 years from 1979. As the effect is widely expected it is difficult to profit from this effect.

January effect is getting weaker by years. There are many reasons for it.

1. Now more traders are trading from tax-differed retirement accounts and therefore no they don’t need to sell at the end of the year for tax benefits.
2. As the effect is widely anticipated markets/investors adjusted for it.
3. Markets have become more efficient and now worldwide markets almost move together.
4. Local and international news and developments greatly affect market performances.
5. Tax reforms also play their part.

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Falling three methods is a candlestick pattern which indicates bearish market continuation even after a temporary halt in trend. This is a multiple candlestick pattern which includes more than three candlesticks; of that first and last will be long bearish candlesticks. The middle candlesticks can be all white (bullish or colorless) or a mix of white and black (bearish or colored) candlesticks. Reliability is highest when all middle candlesticks are bullish.

The requirement of bearish falling three methods candlestick formation include,

• The pattern should be formed in a significant downtrend.
• On first day there should be a long bearish candlestick.
• First day candlestick should be followed by small-bodied candlesticks of following day whose real-body and/or shadow do not cross the range of first day candlestick.
• On last day there should be a long bearish candlestick which should be closed well below the first candlestick’s range.

Bearish falling three methods formation occurs when the bulls are unable to bring the price to new highs after a significant downtrend. This boosts the confidence of bears and prices are then taken to new lows.

Falling three methods is a highly reliable pattern of trend continuation. Reliability increases with shortening of real-body of middle candlesticks and reduction in trading volume on middle days. Confirmation of trend-continuation is still suggested which can be a new candlestick with lower closing.

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The Week Ahead: Financial stocks are leading the way down again as large US banks struggle to re-invent themselves in a weak economy with Citigroup splitting in two and Bank of America reporting a rare loss. Inauguration Day on Tuesday will be the main theme this week as new president Barack Obama takes office. Thursday is the only other day of significance with housing starts, jobless claims, and oil & gas inventories released.

Stocks to Watch: Barclay Capital (BCS), another weak banking sector related company has fallen sharply the last few days as analysts link the drop to the UK lifting the ban on short selling of financials. Belden (BDC) maker of coaxial cables etc. fell for the eighth day in a row after cutting their 2008 EPS forecast, but appears due for a rebound. Elizabeth Arden (RDEN) forecasted Q2 sales to fall 12.5% to 13.5% and the stock collapsed to a 7 year low.

Special Note: Having been consistently behind the recent fall-off in earnings, analysts are now forecasting a 19% drop in Q4 earnings on S&P 500 companies, but this excludes the financial firms. Similarly, despite the dramatic decline in stock prices in 2008, the tendency is to remain bullish as if stocks can only rise from here. This contrary bullish sentiment is also reflected in 12 out of 12 Baron's analysts projecting an average 15.7% gain this year while a Bloomberg survey predicts a 17% gain. Are analysts once again behind the curve?

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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Good-Till-Date (GTD), also known as Good-Till-Time, orders are limit orders to buy or sell products, which - if not filled completely - remain valid in the market until a specified date. GTD orders suit long-term traders and investors who want to bye or sell stocks on reaching specific price levels and traders who lack time to regularly monitor price movements.

Good-Till-Date orders are available for trading most financial instruments including stocks, futures, options and bonds. If not filled completely, GTD orders are cancelled at the close of the market on the specified day (expiration day). Many brokers also let the traders to set a specific (intraday) time for canceling the order. GTD orders are also cancelled if the order is completely filled before the specified date and if the trader cancels the order.

Different brokers have different time limits for order expiration. For most brokers, maximum life-span of a GTD order is 30 days; but there are some brokers who keep orders valid for up to one year. Good till date orders less suit active traders who constantly watch the market. Order execution charges associated with GTD order can vary with brokers; and for most is usually on the higher side.

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Exchange Traded Funds (ETFs) wrap is growing in popularity. There are a number of reasons for it. Below are some advantages that ETF wraps offer over mutual fund wraps and other trading instruments.

1. Expense ratio: ETFs has lesser expense ratio (an average of 36 basic points) than mutual funds (an average of 88 basic points for low cost index funds). Although both ETF wraps and mutual fund wraps include other costs like management fees, those are almost same for both.
2. Tax benefits: ETFs wraps are more tax savvy than mutual fund wraps. Unlike mutual funds which are taxed for embedded capital gains, ETFs are taxed only when an investor sell his holdings.
3. Liquidity and Intraday Trading: ETFs are much more liquid trading instruments than mutual funds. And as ETFs can be intraday traded they offer traders the opportunity to profit from intraday price changes. This is highly beneficial for active traders.
4. Portfolio Management: ETF wraps are much more flexible and manageable than mutual fund wraps. ETFs can be used to diversify trading portfolios, for quick capital gains, for hedging risks, for getting fixed incomes, and for profiting from certain sectors or markets.
5. More transparent: With ETF wraps traders/investors will always informed about his portfolio as ETF firms disclose the asset value on daily basis. This makes ETFs much less susceptible for scandals.

But the trading commissions included with ETF wraps are much higher and this can cause problems for investors, especially for dollar cost averaging investors. The best solution is to trade through a discount broker or brokers who offer commission-free accounts.

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Exchange Trade Funds (ETF) wraps are getting increasingly popular now. These are investment programs offered by brokerage firms/money managers which involve solely investing in exchange traded funds. Like mutual fund wraps investments are made with respect to a pre-selected model/strategy. ETF wraps also involve periodical rebalancing of investments to achieve certain goals.

There are now a number of brokerage firms which offer different types of ETF wrap programs. Mainly the programs can be classified into two.

1. Discretionary ETF wrap accounts: The brokerage firm offer a limited/vast number of asset allocation models which involve investing in different kinds asset allocation models. E.g.: 100% equity models, 100% fixed income models, and balanced models.
2. Non-discretionary ETF wrap accounts: Investors can (with or without help of an advisor) create their own asset allocation model with respect to their profit goals and risk tolerance.

ETF wraps are considered more beneficial than mutual fund wraps as ETFs have lesser expense ratios, have tax benefits and can be intraday traded. But as ETFs are traded just like stocks they include more trading costs; unless trading through a discount broker. There are also some brokerage firms which offer commission-free ETF wrap accounts.

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Descending triangle formation is a bearish triangle chart formation which is just opposite to Ascending Triangle Formation. It is usually a trend continuation formation when formed in downtrend; but also can be a trend reversal formation when formed in an uptrend. Descending triangle can be easily identified and the pattern is recognized by plotting two trend lines, a lower flat trendline and an upper declining trendline.

In descending triangle formation, the lower horizontal trendline connects two or more lows for a period and is flat because prices repeatedly bounce back after touching a support level as bears are failing to break that level. The upper trendline connects two or more highs for a period and is declining because each high is lower than previous one as bears are tightening the grip. Trading volume usually declines with the pattern formation. At breakout price falls sharply and usually trading volume increases.

Descending triangle is considered more reliable when they are formed in a significant downtrend. Sell signals are generated once the price breakout the support level. For next price movements, this breakout point becomes the resistance level. Next price target is equal to the vertical triangle height (longest distance between high and low trend lines) lower to the breakout point. The duration of descending triangle formation can be from weeks to months. Traders are advised to use different indicators and tools to confirm trend breakout.

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Fill or Kill (FOK) orders are market or limit orders which are either completely filled or are not filled at all. FOK orders are practiced to attain certain goals and are not so widely practiced. Fill or Kill orders are mainly placed by day traders and scalpers who wish to immediately buy a large number of stocks at a certain price and/or by arbitrators who want to complete more than one transaction simultaneously.

FOK orders are filled immediately by the broker if the entire quantity of instruments can be matched, if not the orders are automatically cancelled (killed). Not all brokers and markets accept Fill or Kill orders and many brokers have restrictions in placing these orders like 1) the order must be equal (or exceed) a certain number of stocks, 2) orders can be only placed at market hours, 3) these orders are not allowed at/near market closing, 4) the orders cannot be stop or short orders, etc. Often FOK is considered as a restricted order than useful trading tool.

FOK order is similar to All or None (AON) orders and Immediate or Cancelled (IOC) orders. But AON orders are not cancelled immediately if it is entirely filled.

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Relative strength index (RSI) is one of the most used indicators in forex trading. RSI can be used together with other indicators to enter and exit trades. Know more about RSI. In forex trading, RSI can be used for trading any currency pair for any time frame.

In general, any RSI movement below 30 is considered as oversold and buy signals are generated by systems when the indicator break 30 level from below. Similarly sell signals are generated by systems when indicator break 70 level from above. The trader should carefully choose the period of RSI according to his trading goals. Usually, shorter periods like 7 days have more variable RSI producing more trading signals and longer periods like 21 days have stable RSI producing lesser trading signals. The time-frame of charts to which RSI is applied is important. Shorter charts like 5 minute charts generate more signals than longer charts.

RSI offer better results when used together with other indicators like moving average and stochastic crosses. The signals are more reliable when RSI is corresponding to the signals. Fore example a buy signal generated from a crossover is more reliable when RSI is at oversold area and a sell signal is more reliable when RSI is at overbought area.

Advantages of using RSI in forex trading include simplicity and support from both simple and complex trading strategies. Disadvantages include false trading signals and lesser reliability when used singly.

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The Week Ahead: The continued severe drop in unemployment now at 7.2% likely means its momentum will continue well into 2009 with both manufacturing and service jobs being shed. Reports to watch will be the trade balance numbers on Tuesday, business inventories on Wednesday along with the Federal Reserve's Beige Book, the Producer Price Index on Thursday, and December's Consumer Price Index and industrial production releases on Friday.

Stocks to Watch: Electrical parts maker AZZ Inc. (AZZ) boosted 09' earnings guidance after beating estimates for Q3. Vail Resorts (MTN) reported that skier visits are down in the 08'/09' winter season so far. This stock has doubled since November. Palm's (PALM) new touch screen phone was a big hit at the Consumer Electronics Show and could give Apple Computer significant competition. Rambus Inc. (RMBS) reversed a strong advance from its November low after a judge ruled its patent claim against Micron Technologies was unenforceable.

Special Note: Consumer confidence continues to fall with the latest dismal economic numbers. Despite this, the S&P 500 has advanced 27% from the November low with similar advances in the other major indexes. A key indicator for a reversal of this trend is the CBOE Total Put/Call Ratio and its 10-day moving average which has now reached a level signaling a trend reversal as it is now turning up from a level last reached at the all time high in October 2007.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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NobleTrading Direct Access Trading

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For accurately calculating cost basis (and the tax you are liable) you need to know at least five things; 1) the original amount you paid for the stocks and other instruments, 2) the date of purchase, 3) commissions and other fees involved, 4) how you acquired the stocks and 5) benefits if any, usually dividends, you got by holding the stocks. Your personal trading records, brokerage and bank statements, statements on dividend reinvestment and gift/inheritance records can help you in figuring out the above things.

In normal circumstances cost basis is the total amount of investing plus commissions involved. Cost basis is usually calculated on per share basis thus it is derived by dividing the sum (invested amount + commission) with the number of shares purchased.

But many times things can get complicated.

1. In case of a stock split the total cost basis does not changes, but per share cost basis changes with respect to the stock split. E.g.: The total cost basis for 1000 stock purchased for $10,000 will be $10,000 and per share cost basis will be $10. For a 2:1 stock split, per share cost basis becomes $5 ($10,000/2,000 shares).
2. If the trader buys stocks at different prices (1000 shares for $20 and then 1000 shares for $10) and then sells it randomly, according to IRS, he has to calculate the costs basis on first-in-first-out (FIFO) basis. That is if the trader sells 1,300 shares, then the per share cost basis of first 1000 shares will be $20 and remaining 300 will be $10. And his account will now have 700 shares at a cost basis of $10.
3. If you get the stock as a gift, the cost basis will be the original cost basis that applies to the original holder.
4. If you get the stock as inheritance, then the cost basis will be based on the market price of the stock at original owner’s death.
5. If the trader reinvests the dividend in stocks, then his total cost basis is original cost + dividend reinvested + commission charges involved with all trades.

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Ascending triangle formation is a bullish triangle chart formation. It can be a trend continuation formation when formed in an uptrend or trend reversal pattern when formed in a downtrend; the former is more reliable and common. Ascending triangle is an easy-to-identify pattern formed of two trend lines, an upper flat horizontal trendline and a lower rising trendline.

The upper horizontal trendline connects highs for a period; it is flat because the bulls repeatedly fail to break a major resistance level and the price bounce back on touching that level. The lower trendline connects lows for a period; it is rising because each time the bulls have managed to create lows higher than previous one. The trading volume also seems to decrease with pattern formation. At one point of time breakout occurs and the price moves sharply upwards. Usually there is a noticeable increase in volume at breakout.

Ascending triangle is considered as a more reliable formation when they are formed in an uptrend. Buy signals are generated once the price breakout the resistance level. The usually price target is equal to the vertical triangle height (highest distance between a high and low) over the original resistance level (which is now the immediate support level). The duration of the ascending triangle formation can be from weeks to 2 or 3 months. Traders should also use other tools to confirm trend breakouts before placing their orders.

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Cost basis or tax basis is the original price of an asset like stock, bonds, property, funds, etc. This also includes purchasing costs like commissions, buying expenses, shipping costs and purchasing taxes. This original value is also adjusted for any appreciation or depreciation in value (including stock splits, dividend yields, return on distributions, etc) of the property. For tax purposes, cost basis is used for the calculation of capital gains or capital losses. Capital gains/losses are calculated by taking the difference between cost basis and current market value.

Accurate calculation of cost basis is important for traders to accurately calculating their tax payments. This becomes more important if the trader reinvest his dividends and capital gain distributions instead of taking them in cash. If the trader reinvests his earnings he will get a higher tax basis and thus have to pay less tax.

For example the trader buys $10,000 worth stocks and reinvested $1,000 gained as dividend and capital gains on same instrument the trader will have an adjusted cost basis of $11,000. And if the current market value (sale price) of the total stock is $12,000, total capital gain will be $1000 ($12,000 - $11,000). But if the trader does not consider his reinvestments, then he will have a cost basis of $10,000 (original value) and will be paying for a capital gain of $2000 ($12,000 - $10,000).

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The Week Ahead: Despite the countertrend rally that started November 21, the S&P 500 and Nasdaq Composite ended there worst year ever in 2008 while the Dow Industrials ended its 3rd worst in 112 years. The long term trend has begun to roll over in a way that markets haven't seen in two generations. 2009 opened strongly for the major indexes at the end of the holiday season last week, but may get a reality check ahead of the employment report this Friday.

Stocks to Watch: General Motors (GM) may be the most heavily watched DOW stock in 2009 as it will receive the 1st installment of $4 billion of government assistance to help the company survive. Starwood Hotel & Resorts (HOT) signed a confidentiality agreement with its largest shareholder Sam Zell who could be willing to increase his stake in the company. Amazon.com (AMZN) continued its rally as shares hit an eight week high on strong holiday sales similar to Wal-Mart.

Special Note: The next 18 months will find the major indexes marching in tandem towards the convergence of there 4 and 3.3 year cycle lows due by mid 2010. The internal trend line on the Dow Industrials near 9600 was officially breached at the 2008 close putting the DOW in a similar position as it was at the end of 1930 which preceded its worst year ever in 1931 when it declined over 52%. Investors should be aware of the overhead resistance on the DOW for 2009 which looks to be a few hundred points either side of 10,000 before a new major leg down begins.


Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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In order to profit from the currency trading market the traders should use the most suitable forex trading system; to his trading style, trading knowledge and trading goals. Although not a well defined classification, forex currency trading systems can be classified into three distinct classes; automated forex systems, semi-automated systems and non-automated (do-it-yourself) forex trading systems.

Automated Forex Trading Systems: They are good for very active currency traders who are busy trading currencies day and night. They are also good if the trader has not much trading experience. Advantages include time saving, automated order entries and same performance over time (they never get tired). Disadvantages include increased chance of trades resulting in losses, difference in functionality with different systems and they provide the trader lesser chance to learn the market.

Semi-Automated Forex Trading Systems: They are good for active currency traders who have good trading knowledge and want to make decisions their own. They provide traders trading signals and the trader can choose between whether to trade and not to trade. Advantages include time saving and better trading decisions. Disadvantages include false trading signals, more work for human brain and more time consuming.

Do-it-Yourself Forex Trading Systems: They are good for less active currency traders who have very good trading/market knowledge. They only provide market data and technical analysis tools. Traders have to make all trading decisions. Advantages include more informed decision making and more chance for profiting. Disadvantages include increased time consumption and increased workload.

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Upside Tasuki gap is a trend continuation pattern, which indicates the continuation of prevailing uptrend, even after a correction (bearish) day. Bullish Tasuki gap formation includes two bullish candlesticks and a bearish candlestick, and is a relatively rare candlestick pattern

The requirements of a bullish upside Tasuki gap pattern include,

• It should be formed in a significant uptrend.
• The first day should be a bullish day with long white (colorless) candlestick.
• The second day should also be bullish, and the price should open above a noticeable gap.
• The third day should be a bearish day. The candlestick real-body should open within second-day candlestick’s body and should close within the gap formed between first and second candlesticks.

Bullish upside Tasuki gap forms when buying pressure is more than selling pressure. The bearish candlestick of the third day is only a temporary halt of current trend; formed because some traders want to take profit from their positions. The partial filling of the gap denote that the sellers have not yet got control of the market.

Upside Tasuki gap is a moderately reliable pattern (but better reliable than downside Tasuki gap). Reliability increases with lesser trading volume on third day, with increase in gap, with decrease in real-body size and with similarity of second and third candlesticks, and with the lesser the gap is filled. Conformation of trend-continuation is strongly suggested, which can be a higher opening, a new gap or a bullish candlestick on forth day.

Thing to note: If the gap is filled completely by the third-day candlestick, then the pattern is considered very weak indicator of trend-continuation; and the chance of trend-reversal increases substantially.

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